New Size Criteria for European Companies: Impacts on the employment of the CSRD

published on 9 November 2023 | reading time approx. 3 minutes

With the most recent Delegated Directive of 17 October 2023, the European Commission (EC) has officially amended the criteria for defining the size of companies and groups in the EU.

The impact of these changes includes a substantial reduction in the number of companies that will fall within the scope of the Corporate Sustainability Reporting Directive (CSRD) already from the financial year 2025. The changes to the size criteria have been adopted by the EC through a Delegated Directive on 17 October 2023. The Delegated Directive will come into force three days after its publication in the Official Journal of the European Union. Member States will therefore have a twelve-month timeframe to implement the resulting amendments to their national laws.

Considering the significant impact inflation of recent years^[1], the European Commission deemed it appropriate to review and, consequently, redefine the company size criteria, which will have a major influence on the employment of the new sustainability reporting framework in the EU.

The purpose of the audit has been to ascertain whether the previous thresholds resulted in disproportionate administrative and reporting burdens for some companies. As a result of the review, the European Commission decided to increase the thresholds on balance sheet and net turnover, while leaving the threshold for number of employees unchanged (see table below). The subdivision of companies into 'micro', 'small', 'medium-sized' and 'large' still relies on compliance with two of the three above-mentioned size criteria laid down in the directive.

One of the main impacts of the changes to the size criteria is the substantial reduction in the number of companies falling within the scope of the CSRD. The CSRD, which is currently being transposed into the national laws of all EU Member States, will gradually stand out sustainability reporting obligations on all small, medium, and large companies in the coming years. Increasing the thresholds by which these categories of companies and groups are defined will exclude a significant number of companies to which CSRD would otherwise be applicable.

Thus, companies with at least two requisites between: 250 employees (unmodified) and/or revenues greater than EUR 50 million (previously 40) and/or balance sheet greater than EUR 25 million (previously 20).

The new criteria inevitably lead to two initial remarks: on the one hand, it can be considered as a fair and proportionate measure in favor of all those companies that, due to the increase in inflation (especially in the last two years), have unexpectedly found themselves subject to CSRD; on the other hand, the reduction of companies subject to CSRD hinders the achievement of the European climate targets and limits the availability of reliable sustainability information necessary for financial institutions or investors in order to fulfil their sustainability reporting obligations and for due diligence in lending and investment decisions-making.

The amendments will allow companies that still have gaps in the implementation of concrete ESG policies and related reporting to have more time to address these shortcomings and be ready for when CSRD reporting becomes applicable to them. In any case, it should be emphasized that concrete corporate ESG policies (and clear and correct reporting) are now required by all stakeholders and often even smaller companies are fully involved as suppliers of larger companies that remain subject to CSRD. For this reason, it is advisable that even companies that are currently excluded from the employment of CSRD, pay close attention to their ESG policies and attach the utmost importance to their reporting in order not to find themselves under great difficulty with their main clients.

[1] According to Eurostat data, over the roughly ten-year period from 1 January 2013 to 31 March 2023, cumulative inflation stood at 24.3 per cent in the euro area and 27.2 per cent in the EU as a whole.